Some people ask me what the tax rate is for trusts. Trusts are treated as a separate tax entity, but they generally do not pay tax. They are what is called a ‘flow through entity’ with any income received flowing out to the beneficiaries of the trust. When this happens, it is the beneficiaries who will pay tax on the income of the trust when they become entitled to that income. Where the trust retains income or doesn’t make any beneficiary entitled to that income then the trustee of the trust will be taxed on that income at the top marginal tax rate. There are some exceptions to these rules though, for example the trustee of a trust set up under a will might retain the income and be taxed on the income tax rate of the child beneficiary of that will. Example Homer sets up a discretionary trust which invests in shares. Homer is the trustee and distributes the trust income to his 3 children who are all over the age of 18 and are not working. The trust income for the year of $60,00 and Homer makes each child presently entitled to $20,000 in income. The trust itself does not pay tax, Homer as trustee does not pay tax on any of the income, but the children who are entitled to the income add the $20,000 to their other taxable income for the year and pay tax on this. Since none of them are working they will not pay any tax on this income. Note that if Homer as trustee does not transfer the $20,000 to them, they are still treated as if they had received it for tax purposes and will be taxed on it. They will be owed this morning by Homer in his capacity as trustee and can demand payment and sue for it (another topic for a legal tip).